bne:Invest in Astana - April 2014

Content: 1 Top Stories 4 Interview 6 Feature 8 Sector12 Chart13 News in brief

April 2014 www.bne.eu

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Top story

Kazakh banks fight panic with education

When a bank and pollsters planned a nationwide survey to measure the financial literacy of Kazakhstan's population, little did they know how handy the findings would be in helping to explain the financial panic that gripped the nation in February. Apparently, a lack of financial awareness worsened the situation, leading to a run on several banks, explains the head of Kaspi Bank, a major Kazakh retail bank that helped organise the survey.

Kazakhstan's National Bank announced on February 11 a devaluation in the tenge which would allow the exchange rate to drop from KZT155 per dollar to KZT185, precipitating a 19% plunge in the value of the national currency. Some owners of tenge-denominated deposits

rushed to withdraw their savings or convert them into foreign currency, mostly dollars or euros.

Further panic gripped the nation a week later when rumours started circulating via text message about the imminent bankruptcy of three Kazakh commercial banks – Alliance Bank, Bank CenterCredit and Kaspi. The three banks dismissed the rumours as "provocations aimed at destabilising Kazakhstan's financial system", while Kaspi announced a KZT100m ($540,000) reward for any information leading to the source of the rumours.

The rumours resulted in customers withdrawing about KZT40bn (some $220m), or 10% of total deposits, from Kaspi alone, forcing its controlling

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Mikhail Lomtadze


shareholder, private equity firm Baring Vostok Capital Partners, to provide the bank with $300m to meet the demand for cash.

Kazakhstan faced the threat of a bank run and, potentially, a systemic failure reminiscent of the country's banking collapse as the subprime crisis unfolded in 2007, which saw BTA, then thecountry’s largest bank, nationalised in February 2009 and sovereign wealth fund Samruk-Kazyna taking majority stakes in BTA subsidiary TemirBank and Alliance Bank, as well as minority stakes in Kazkommertsbank and Halyk Bank.

What you need to know The overreaction by the general public has been blamed on the generally poor level of financial literacy among the Kazakh population, as shown by the survey conducted by the Almaty-based International Centre for Financial Literacy jointly with Kaspi between January 27 and February 12.

The poll of 1,200 people aged between 20 and 80 showed that only 6% of those surveyed knew that the Kazakhstan Deposit Insurance Fund provided 100% coverage on deposits of up to KZT5m ($27,000) held at banks participating in the scheme. "Only every second person knows that the deposits are guaranteed, and only 6% know the maximum amount of guaranteed deposits stands at KZT5m," Kaspi's chairman, Mikhail Lomtadze, told a news conference in Kazakhstan's financial capital Almaty on March 13. "This explains why the February 2014 devaluation caused panic among the population. We should put more effort into increasing financial literacy."

For this purpose, under its "Simply about Finances" educational programme, Kaspi announced that it would invest $1m in competitive projects devised by individuals and organisations to help promote financial literacy among the population.

Lomtadze also cited the poll findings that almost half (44%) of Kazakhs with spare money kept it at home "under the mattress" and less than one in 10

(just 8%) deposited it in banks. "We hope that our 'Simply about Finances' educational programme will improve these indicators and people's interest in bank deposits will grow," he said.

Lomtadze's Kaspi is a significant player on the Kazakh consumer loan market, and as a result of the global financial crisis the bank decided in 2009 that it would operate its consumer loan business in tenge only so that the bank's clients would not have "to bear any foreign currency risk because they receive income in tenge, which is why we issue retail loans in tenge."

In an interview with bne, Lomtadze says that because of this the February devaluation of the tenge had no impact on Kaspi's clients. "As a result of the change in the exchange rate in February, the payments on our loans will not increase and our customers continue payments on their loans in tenge as they did in the past," he says.

At the same time, Lomtadze claims that Kaspi's loan portfolio isn't in a worse state than those of other Kazakh banks. The share of non-performing loans is around 5%, well below the industry average, despite the fact that Kazakhstan's legislation doesn't provide adequately for writing off loans. "What should be changed in the Kazakh banking sector is that banks should be allowed to write off non-performing loans. This will considerably clean up banks' balance sheets. Now, when you look at a Kazakh bank and compare it to a Russian bank which is able to write off bad loans, it seems the share of non-performing loans in a Kazakh bank's portfolio is higher than in the portfolio of a Russian bank, but the actual difference is small."

Lomtadze says that even though Kaspi is heavily dependent on deposits as a source of funds, the bank also raised money from bonds on the domestic and international markets. "Last year we were the first Kazakh private, non-state-run bank to issue Eurobonds since the global financial crisis. The sum wasn't large - $200m. We wanted

April 2014


to re-introduce Kazakh banking and Kaspi Bank to international investors," Lomtadze says.

Kaspi is upbeat about its place in Kazakhstan's financial market, and Lomtadze believes his bank has been strengthened by the recent troubles: it now has a loyal customer base and a strong team with tested resilience. As a bank focused on retail banking, Lomtadze says Kaspi places great value in people, both clients and staff: after the bank run, Kaspi decided to reward clients who decided to stay with it with a loyalty bonus of 1% of their tenge-denominated deposits, and each member of staff received a bonus of KZT100,000 ($550) for their dedicated work during the 72-hour-long period of panic. Like workers at many industrial enterprises and public sector organisations, following the February devaluation Kaspi's staff received a 10% pay rise.

Changes within the competitive landscape of the Kazakh banking sector, with Kazkommertsbank acquiring the ailing BTA, and HSBC quitting Kazakhstan altogether, don't seem to trouble Lomtadze much, and at the moment Baring Vostok had no plans to reduce its shareholding. "I see a disadvantage in foreign banks leaving the market in that they take together with them international experience. It is good to have them as competitors, as they bring to market new products and practices used in other international markets. It is interesting to compete against them."

While some foreign investors may be considering leaving emerging markets, Baring Vostok is there to stay with Kaspi in Kazakhstan, Lomtadze says.

April 2014


InterviewKazakhstan’s high-tech agenda

Kazakhstan’s government has put an increasing emphasis on diversifying the economy and making existing sectors more efficient. Kazakhstan’s National Agency for Technical Development (NATD) is working to encourage innovation and the adoption of new technologies - both those developed domestically and through international technology transfer.

The NATD is the successor to Kazakhstan’s National Innovation Fund (NIF), which was launched by the government to stimulate the venture capital market, acting as a fund of funds as well as making direct equity investments.

However, in 2010, shortly after the launch of the five-year state programme for industrial-innovation development, the NIF and its subsidiary, the Centre for Engineering and Technology Transfer, were merged into a single entity, the NATD. The NATD is owned by Baiterek Holding, which was set up in 2013 to manage several Kazakhstani development institutions, and in turn is wholly owned by the Ministry of Industry and New Technologies.

While the NATD still supports start-ups, its main focus is somewhat different from its predecessor’s. The agency’s managing director Zhumatai Salimov explains that its primary role is to support industry and innovative development in various sectors of the economy.

While the agency works with the Ministry of Education and Science, “fundamental science is not our core goal,” he says. “Our role is to help industry to become more innovative, introduce more modern technologies, and help industrial companies to upgrade their level of productivity.”

The grants provided by the agency “aim to support modernisation and upgrading, unlike the classical definition of innovation as in Europe. The priority for us is to develop a very strong industrial base, because there is a need of an industrial base to generate innovation,” Salimov tells bne.

The NATD has stepped up its activities in recent years. Between 2010 and 2013, the government assigned $64.3m for innovation grants. In 2010, the NATD supported 37 innovation projects with a total sum of $11.2m, and between 2011 and 2013 it spent $53m on 173 grants.

The range of grants offered has also been expanded. Previously the agency used to provide four types of innovation grant; since 2012 it has offered nine types of grant, of which the majority are to support industrial clients, for projects such as training staff abroad, acquisition of technologies, and the introduction of new management or production technologies. Other grants, such as those for commercialization, patenting abroad and start-up grants, are for small innovators, scientists and start-ups.

The NATD is also working to promote technology transfer, including through the launch of technology centres with international partners. Kazakhstan already has a very active Kazakhstan-Korea Technology Cooperation Centre, and signed an agreement to set up a similar centre with Norway in 2013. The NATD now plans to set up joint centres with France, the US and at least one other country.

Kazakhstan faces several challenges similar to those experienced in other CIS countries. While the Soviet Union was extremely strong in many areas of science and technology, there is no history of commercialisation. In addition, the years of crisis following the breakup

April 2014


of the Soviet Union took their toll on the country’s scientific base. “We understand the challenges faced by the former Soviet republics. Previously, the economy was centrally planned and research and development was carried out in government institutions,” says Salimov. “In the competitive environment, where we now exist, science has the challenge of also being a good marketer.” In response to this need, the NATD has a commercialisation division that works with universities and research centres.

Kazakhstan inherited from the Soviet Union a local scientific capacity that was strong in fields including metallurgy, biotech, aerospace and basic sciences such as physics and maths. “The problem is that the today the average age of our

scientists is around 60 plus years,” Salimov says. “In the 20-year period after the collapse of Soviet Union, we faced economic crisis and there were more important social issues to tackle. Financing of science was suspended and we lost a lot of our capacity and infrastructure.”

Recently, however, the Kazakhstani government has encouraged more students to go into science, including funding scientific studies abroad through the Bolashak programme. Of the 10,000 students who have studied abroad through the programme, 5,000 have already graduated and returned to Kazakhstan, and around half of them have a technology background. Disciplines such as oil and gas engineering, ICT and electrical engineering are strongly represented among recent graduates.

April 2014


Kazakhstan's mining sector stands to benefit from the February devaluation of the national currency.

Kazakhstan's central bank devalued the national currency from KZT155 to KZT185 to the dollar on February 11, in an effort to counter a gradual 10% decline in the value of the Russian ruble since late last year. Russia is Kazakhstan's largest trading partner, accounting for over a third of the country’s imports, and Kazakhstan's trade deficit with Russia stood at around $12bn last year.

In the short term, at least, the devaluation will certainly favour Kazakhstan's mining companies, which mostly export their output. This should translate into a windfall for the Kazakh government; since oil and gas and other raw materials account for over 90% of Kazakhstan's exports, and are priced in dollars, the budget will receive more cash in tenge terms for its commodity exports.

"In general, we believe the devaluation is a positive phenomenon for the mining sector because mining is labour intensive, while revenue from

it is in hard currency. That is why since most production costs such as wages and taxes remain in tenge and revenue in dollars, we expect profit margins to go up because of the devaluation," Leila Kulbayeva, a mining analyst at Almaty-based investment bank Visor Capital, tells bne. "However, the devaluation will not have an impact on output figures in the mining sector, as output depends on production capacity and the global demand. The global markets are quite volatile now and as a major consumer of metals China has not shown signs of increasing demand."

Fears that higher inflation and falling living standards could worsen simmering grievances miners hold against their employers have forced some companies to pledge a 10% wage hike.

Alex Nice, a Kazakhstan analyst at the London-based Economist Intelligence Unit, reckons any competitive gains could be short-lived. "The devaluation created a lot of public anger, and there has been widespread coverage of the likely impact on the cost of living. As a result, we could see workers demanding price-indexed wage rises," he says.

Indeed, pressure could build on Kazakh mining companies to do more to improve labour relations. Fearing job cuts, workers at Kazakhstan's major copper producer Kazakhmys and steel giant ArcelorMittal Temirtau have staged protests against poor working conditions and low pay in recent months, and the rising cost of living could provoke further social discontent among Kazakh miners if their employers fail to meet their expectations.

Nice points to the need for Kazakh mining companies to cut costs to make their output competitive, which would mean reducing the workforce, but this is opposed by the

Feature

Devaluation to benefit Kazakh miners

April 2014


government. "Some Kazakh mining companies are still suffering from a problem of excess capacity. The devaluation will have provided some respite, but the companies remain in a difficult position because there is pressure from the government to avoid redundancies," Nice says. "The authorities seem to be taking a dual approach to the issue. On the one hand, they are exerting pressure on companies (particularly those which are foreign owned) to avoid redundancies and maintain wages; at the same time, there are proposals to amend the labour law to make it harder for unions to organise strikes."

Playing to the gallery Since the violent protests in the western oil town of Zhanaozen in December 2011, when Kazakh security troops killed 15 people, the government has taken seriously the grudges of local miners, who believe the country's growing prosperity is being built at their expense. After the devaluation in February, President Nursultan Nazarbayev personally urged the mining companies to increase pay by 10%. "The Kazakh government is acutely sensitive to labour unrest, particularly following the 2011 unrest in Zhanaozen," says Kate Mallinson, a Kazakhstan analyst at the London-based GPW consultancy. "Many of the country’s cities and towns were built around mine sites and corporate social responsibility expectations remain high. In light of the recent devaluation and the concomitant inflationary pressure, the government is likely to increasingly put the burden on large mining companies to address the situation with increased salaries."

The Kazakh government does not tend to alienate foreign investors, but occasionally plays to the gallery: it openly criticised pay policies at ArcelorMittal Temirtau, whose billionaire owner Lakshmi Mittal is reported to have made additional investment conditional on further cost savings.

Kazakh Deputy Industry and New Technologies

Minister Albert Rau claimed at a parliamentary conference on labour relations on March 14 that ArcelorMittal Temirtau did not remunerate workers properly for their qualifications. "At Arcelor, shame to point out, the difference in pay for qualifications is pennies. Of course, it is easier [for workers] to create noise than work on improving their qualifications," Rau said. "On this, to tell the truth, we do not have a good understanding with the management."

The government, aware of the problems in a sector that has been stagnant for several years due to sluggish global demand, is working on improving the business climate. "In spite of Kazakhstan’s mineral pedigree, many deposits are underinvested as a result of various issues including the bureaucratic nature of approval and regulatory processes. Recent initiatives to liberalise the sector and encourage foreign investment are a positive step to increasing output," says Mallinson.

The potential for social unrest linked to the February devaluation in Kazakhstan will rise further if, as expected, more economic and political sanctions are imposed by the US and EU on Russia for its annexation of Crimea. A further fall in the Russian ruble could quickly eat up the estimated 10-percentage-point spare room that Kazakhstan's National Bank gave the tenge in dropping its value by a fifth, and some argue it might have to devalue the currency again. "When the trade balance worsens, this affects the exchange rate. Theoretically, if the Russian ruble depreciates for a long time – for, let's say, six months – this will represent risks of further devaluation for the tenge," Visor Capital's Kulbayeva says.

Despite the short-term benefits of the devaluation for Kazakhstan's mining companies, they may yet find themselves in an awkward position because of the very source of these benefits.

April 2014


Worries grow in Kazahstan over its membership of Russia-led Customs Union

Kazakhstan's membership of the Russia-led Customs Union continues to cause controversy. The bone of contention has so far been the damage the membership is inflicting on Kazakhstan's economic interests, but the Kremlin's behaviour towards Ukraine is clearly raising tension amongst Kazakh officialdom.

On April 8, Kazakh First Deputy Prime Minister Bakytzhan Sagintayev wayed into the simmering debate, which that week centred on claims Kazkhstan's food security is suffering due to its membership in the free trade area that also includes Belarus. Addressing a press conference, the official insisted Kazakhstan will have levers available to protect it from any danger of domination by Russia once the project widens.

As the second largest of the former Soviet economies, Ukraine's participation in Russia's pet project to form a Eurasian version of the EU, the so-called Eurasian Economic Union, is seen as crucial. Moscow's pressure on the interim authorities in Kyiv is widely understood to be part

of a effort to force it to abandon plans to sign up to a political and trade pact with Brussels. The Russian annexation of Crimea in March has prompted concern in Kazakhstan over ceding sovereignty to the Eurasian Economic Union, a structure which will be dominated by the Kremlin.

ResurrectionAddressing these concerns, Sagintayev said Astana would be able to defend its interests using two supranational bodies - the Eurasian Economic Commission and Eurasian Court - in which, he claims, the equality of parties will be ensured. "There will be equality in the court as each party [member state] delegates two judges," Sagintayev said, adding that the alliance is not political but economic.

The official also insisted that membership in the Eurasian Economic Union, which is expected to be formed in 2015 by members of the Customs Union, which should also by then include Armenia and Krygyzstan, will not prevent Astana from developing relations with other countries. "It is important to stress that according to the treaty nothing bans us from concluding treaties with third countries and international organisations," Sagintayev told a news conference. "This is our principle of multi-vector foreign policy."

However, sensitivity to speculation that the plans are little more than a "resurrection of the Soviet Union" remains. Russia's First Deputy Prime Minister Igor Shuvalov floated an idea in March that a Eurasian Central Bank could be set up by 2025. That revived speculation seen in recent years years that Kazakhstan could at some point lose its national currency to adopt either the Russian ruble or another Eurasian currency.

Sagintayev, however, dismissed such talk out of hand, and insisted

Sector

April 2014


Kazakhstan will not give up the tenge. "I don't know where rumours about a single national currency of the Eurasian Economic Union come from, but we've never discussed these issues. Kazakhstan has had, and will have, the tenge," he said. Forbes Kazakhstan has reported that a single financial regulator for the Eurasian Economic Union will be established in the Kazakh financial capital Almaty.

Nervously watching UkraineDespite the authorities' insistence that Kazakhstan is a full and equal partner in the project, there are signs that Astana is nervous as it watches events in Ukraine. Russian forces are reported to be massing on the border with eastern Ukraine, and Moscow insists it reserves the right to move in to protect ethnic Russians from what it claims are fascist forces in Kyiv. Ukraine, meanwhile, blames Russian provocation for the ongoing protests and occupation of government buildings in cities in the east of the country.

Kazakhstan also has a large Russian minority, mainly in the north of the country, and is clearly wary of any similar action against its sovereignty. On April 8, local media reported that the government is to criminalize "separatist activities" and raise tough new penalties, in a new draft of the criminal code.

“The draft criminal code will have a new article that criminalizes separatist activities. Calls for illegitimate, unconstitutional changes to the territorial integrity of Kazakhstan or disintegration will be considered a criminal offense," Arman Ayaganova of the Prosecutor General's Office, announced, according to Tengrinews. Under the new legislation, calls for the illegitimate violation of Kazakhstan's territorial integrity will be punishable by up to 10 years in prison.

Analysts say the move bars the way towards federalization and creation of national autonomies, but warn that due to vague language

the law could also be used against any protest - noting the recent rise in complaints over the economy since the devaluation of the tenge in February.

Russia insists that federalization is the only route out of the standoff in Ukraine. Kyiv rejects the call, saying such decentralization would set the scene for further secession of regions.

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Samruk-Kazyna: restructuring programme offers chance of Phoenix-style resurrection

Last year Kazakhstan's sovereign wealth fund Samruk-Kazyna embarked on a number of programmes, one of them aims to restructure the fund to live up to its stated objective of boosting the national economy's competitiveness and sustainability through modernisation and diversification.

Set up in 2008 the fund, with the aim of managing Kazakhstan's state-owned national companies and development institutions, was formed through a merger of the Kazyna fund for sustainable development and the Samruk holding company to manage state-owned assets. The sovereign wealth fund's business interests extend from energy and petro-chemichals to metals, transport and infrastructure. Samruk-Kazyna's business empire includes state-owned companies such as KazMunaiGas (oil and gas), Kazatomprom (uranium), Kazakhtelecom, Air Astana, Kazakhstan Temir Zholy (railways), KEGOC (power grid), Samruk-Energo (power), Kazpost and a handful of other assets with their hundreds of subsidiaries.

The restructuring programme is part of the transformation of Samruk-Kazyna from the administrator of state-owned assets into an active investor in line with the philosophies of

the world's leading wealth funds - Malaysia's Khazanah, Singapore's Temasek and Abu Dhabi's Mubadala. Restructuring will free the national companies up from non-core assets like spas, hotels and other businesses which will be sold, disestablished, reorganised or handed over to central and local government bodies. In total, up to 209 non-core assets out of around 600 businesses Samruk-Kazyna manages through its subsidiaries are planned to be funnelled out of the fund's management.

Under orders to transfer its assets to the private sector from the Kazakh government, the sovereign wealth fund will sell 103 companies and business entities, currently run by KazMunaiGas, Kazatomprom, Samruk-Energo, Kazakhstan Temir Zholy and others, partially or completely in 2014-2016. This initiative of the government aims to further strengthen the country's economy.

Assets that will be privatised constitute about 7.5% of the fund's assets which were estimated at up to $100bn at the end of 2013. The privatisation of these enterprises could raise up to $4bn for the fund. The list of the companies which will face privatisation has been sent to the government and its endorsement is expected in the near future. The Kazakh government will also set deadlines and conditions for their privatisation. Samruk-Kazyna is expected to invest the money raised in the development of new production facilities which Kazakhstan's private investors cannot set up for objective reasons such as a lack of experience and financial capacity, and foreign strategic partners' unwillingness to provide funds on acceptable conditions without state guarantees.

The fund has suggested a number of ways to privatise assets. This varies from initial or secondary public offerings, including "people's IPO" that will encourage the general public to invest in shares of these companies, to auctioning of these assets in order to attract strategic investors. The disposal of these

April 2014


assets will help Samruk-Kazyna achieve greater transparency, efficiency and flexibility in both the fund and state-owned companies.

In general, the fund will enforce its activities in two directions: first, increasing the established companies' revenue via boosting their efficiency, and, second, raising revenue from developing start-ups. Samruk-Kazyna also intends to modify its approaches to investment activity by increasing the share of loans in the total financing of projects from 54% to 70%. The fund has already made significant progress in this area: it plans to complete 18 investment projects worth $3.3bn in 2014, including six projects as part of the state’s fast-track industrialisation programme.

Despite being in the initial stages, a number of initiatives such as cost optimisation programme, centralised treasury operations control system, implementation of online procurement scheme have already enabled Samruk-Kazyna to enjoy notable achievements: the key indicator of efficiency - EBITDA margin - increased from 19.3% in 2012 to 21.3% in 2013, while profits grew from KZT628.4bn in 2012 to KZT 653.8bn in 2013.

Samruk-Kazyna is made up of two words which mean phoenix and treasury in Kazakh, and with such grand plans, living up to its name, Kazakhstan's sovereign welfare fund will regenerate the country's economy and replenish its national treasures.

April 2014


Chart

The chart shows the distribution of answers to the question "Where do you keep your spare money?" in a poll entitled "Financial Literacy", conducted by the Almaty-based International Centre for Financial Literacy and Kaspi Bank throughout Kazakhstan

between January and February 2013, aimed to establish the level of the Kazakh population's basic knowledge about finances, banks and their services. The poll involved face-to-face interviews with 1,200 people aged between 20 and 60.

April 2014


Massimov returns as Kazakh PM

Kazakhstan’s Prime Minister Serik Akhmetov resigned on April 2, amidst persistent anger over the February devaluation of the tenge. He has been replaced by Karim Massimov, already Kazakhstan’s longest-standing PM, with some suspecting the move is also connected with the background race to succeed the president.

Technocrat Akhmetov was seen as a temporary figure and his sacking had been expected for months, amid growing discontent within Kazakhstan over the economy and living standards. President Nursultan Nazarbayev nominated Massimov, who served as prime minister between January 2007 andSeptember 2012, to replace Akhmetov, and his appointment was approved by parliament.

Nazarbayev told the house: "I believe [Massimov] is known to us all. I don't need to talk much about him. He worked [as prime minister] in the … crisis period of 2007-2009. To further develop the economy we need efficient work inside the country and with key foreign partners.

"I believe Massimov's candidacy is the most suitable for ensuring the efficient work of the government in the present conditions. He will get down [to the job] immediately and he doesn't need to get acquainted with anyone. He worked with me and he also needed this experience," Nazarbayev added, according to the presidential website, in reference to Massimov’s stint at the helm of the presidential administration between his terms of premiership.

Heads will rollNazarbayev had previously threatened to sack Akhmetov’s government. He told an expanded government meeting on February 14 that heads

would roll if progress was not made to speed up economic growth and attract more investors.

That threat came as the government’s popularity nosedived. A devaluation of the tenge days earlier provoked anger across the country as purchasing power dropped. While both civil servants and workers at many major industrial companies have been given a 10% pay rise to compensate, criticism of the government has grown. In addition to a series of small-scale demonstrations in Almaty, Kazakhs have become increasingly vocal on social media.

In a new development for Kazakhstan, some critics have publicly blamed the president directly, as he is ultimately responsible for government policy. However, for the most part the scapegoats have been Akhmetov’s cabinet and central bank governor Kairat Kelimbetov.

The change of PM also coincides with the crisis in Ukraine. Nazarbayev has firmly sided with Moscow, offering unquestioning support for the Kremlin's annexation of Crimea. Meanwhile, Massimov, a technocrat like Akhmetov, is regarded as a neutral figure who is capable of balancing the interests of Russia, China and the West.

Nazarbayev's optimism about Massimov doesn't resonate with many critics of the government. "It's hard to say how the previous prime minister and his cabinet is different from the new prime minister and his cabinet. There is no fundamental difference. There may be some changes in certain ministries but this is usually a rotation of the same old pack of cadres from one post to another. The backbone of the government will stay put," Almaty-based political analyst Rasul Zhumaly told bne, adding that the previous governments were largely

News in brief

April 2014


preoccupied with solving short-term tasks and lacked vision. "There have been many government programmes … that were supposed to modernise the economy but none of them have been completed despite billions spent."

Kazakh political analyst Yerlan Karin suggested in an interview with Tengrinews that Massimov will revitalise Kazakhstan's standing with foreign partners, both politically and economically. "He is known to a wide circle - businessmen and representatives of international financial and economic structures, and these contacts and the experience he possesses should of course help in implementing a new global strategy, finding new reserves and new sources of foreign investment."

However, in Zhumaly's opinion Massimov's appointment can do little to attract foreign investment to Kazakhstan without significant changes in the investment climate. "Investors and investment do not go somewhere because someone has come to the government or a company, they go to markets where there are comfortable conditions, a favourable regime and stability," Zhumaly said.

The return of Massimov to the political stage will invite speculation about succession. The question of who will replace the 73-year-old Nazarbayev - Kazakhstan’s first and so far only president - is considered to be the main political risk for the country. Standard & Poor’s wrote in December that, “institutional risks remain high given the lack of clarity concerning the eventual presidential succession and the corresponding policy implications.”

Kazakhstan to combat capital flight offshoreKazakh financial police says it will step up efforts to prevent funds from being transferred to offshore accounts and to improve transparency over ownership.

"Developing our anti-corruption strategy, we paid close attention to the problem of large-scale use of offshore accounts by domestic enterprises," Olzhas Bektenov, from Kazakhstan's Agency for Combating Economic Crimes and Corruption, said on March 19.

"In addition to the permanent transferring of money abroad, there is one more threatening problem. It is the lack of transparency in the structure of ownership in strategic Kazakh companies. Currently, the identification of the ultimate beneficiary is not possible," Bektenov told a meeting of Kazakhstan's public council on anti-corruption and the shadow economy, according to Kazinform.

Bektenov also warned that funds laundered abroad are often brought back to Kazakhstan "under the guise of respectable foreign investment". Astana will launch "a system of inter-country, real-time exchange of information," by the end of 2015, he added.

Last month, a Kazakh deputy proposed the country should create its own offshore zone, in a bid to keep capital from leaving the country. "Kazakhstan invested $3.6bn in the Virgin Islands, $2.6bn in the Seychelles, and $1.9bn in Cyprus," claimed Tursunbek Omurzakov, according to Trend.

He noted that a Russian plan for an offshore zone in the Far East creates an additional risk of capital flight, as there will be no restrictions within the Customs Union. "We should work with such countries: sign agreements and exchange tax information," he demanded.

The ministry of economy has drawn up a programme to combat the shadow economy in 2014-2015. Astana is also working to encourage cashless payments in an attempt to reduce the size of the shadow economy.

April 2014


Kazakhstan to supply wool to international fashion chainsKazakhstan is to start supplying wool to international clothing retailers including Benetton, Zara and H&M, the state agricultural holding company KazAgro announced on March 19.

Wool from Kazakhstan's southern Zhambyl region has already been shipped to Italy, under a $589,000 contract signed between KazAgro's KazAgroProduct and VICOTEX. Kazakhstan will supply 72 tonnes of wool top (a semi-processed wool product) to the Italian company, of which 18 tonnes have already been exported.

KazAgroProduct plans to sign additional contracts to export 140 tonnes of wool top, and may export a total of up to 500 tonnes this year.

The wool has been processed at a joint venture between KazAgroProdukt and Factory SEP - Taraz using equipment from Europe.

"Tops produced in Kazakhstan will be used for the production of end products by leading European clothing companies such as Benetton, Zara, Gruppo Marzotto, H&M, Fratelli Piacenza SPA, Lanerossi, Marchi e fildi SpA," KazAgro said in a press release.

1.5 million Kazakhs to get post-devaluation pay riseCivil servants and other state employees will get a 10% pay rise this year, to compensate for the February 11 devaluation, when the tenge dropped 19% against the dollar.

Kazakhstan's Minister of Labour and Social Protection Tamara Duisenova announced March 17 that 1.5 million state employees including both civil servants and unskilled workers would receive a pay rise.

The salary increase for civil servants will be staggered, with salaries increasing on April 1, 2014 followed by further increased with the introduction of a new wage model for civil servants on July 1, 2015.

The total cost of the initial pay increase to the state will be KZT63.5bn ($350m), Duisenova told a briefing at the Central Communications Service in Astana. The government has also prepared a social package including higher pensions and disability payments.

The National Bank of the Republic of Kazakhstan (NBRK) announced February 11 that it would no longer maintain the tenge in a range of KZT145 - KZT155 to the dollar, and allow it instead to trade at around KZT185, with a range of plus or minus KZT3.

Given Kazakhstan's highly dollarised economy, the devaluation was almost immediately passed on to consumers, who suffered a sharp drop in purchasing power despite government efforts to prevent price hikes for food and other basic goods.

This sparked a backlash within Kazakhstan, where there have been a series of small-scale demonstrations in the largest city Almaty since February 11, and widespread criticism of the government on social media.

In addition to the pay rise for state workers, the government has also put pressure on major employers to increase salaries in a bid to prevent social unrest in industrial cities. Mining giants such as ENRC and Kazakhmys have said they will give employees a 10% pay rise, and a salary increase is also expected at companies owned by Kazakhstan's sovereign wealth fund Samruk-Kazyna.

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Kazakhstan adopts new law on bankruptcyKazakhstan has adopted a new law on bankruptcy that is expected to make the bankruptcy process more transparent and help protect creditors' rights.

The law on Rehabilitation and Bankruptcy was signed into law by President Nursultan Nazarbayev on March 15, the presidential press service reported.

The Kazakh government has been working with the World Bank to improve legislation on bankruptcy and to draft new legislation on rehabilitation and insolvency.

Bringing legislation on bankruptcy into line with international standards is expected to improve Kazakhstan's business climate and encourage investment.

A 2013 report from the World Bank pointed out that before the reform process was launched, Kazakhstan's Law on Bankruptcy "was heavily weighted in favour of strict piece meal liquidation – assets were sold individually many times undervalued."

Meanwhile, rehabilitation procedures were rarely used - they were applied in just 0.6% of bankruptcies in 2009 and 2% in 2010.

Kazakhstan has already introduced preliminary amendments to the law on bankruptcy in 2012, which, according to the World Bank, has "already produced positive results."

Kazakhstan aims to raise $5bn in investment from UAEThe Kazakhstani government hopes to attract a total of $5bn for dozens of investment projects

from the UAE, Kazakhstan's ambassador to the UAE has said. Astana wants to attract investment from the UAE for 77 projects in a wide range of sectors including petrochemicals.

"The UAE is one of the most desired countries to cooperate with and to achieve the development plan in Kazakhstan," Ambassador Kairat Sharif said in an interview with Gulf News.

"Despite the fact that the UAE-Kazakhstan has a strategic relation and doing very well on the political level in addition to the economic cooperation, we need to enhance these ties further... It is just the beginning and we are looking to target landmark projects from the UAE."

UAE investors have already launched projects worth around $3bn in Kazakhstan. The largest of these is the Abu Dhabi Plaza, which is due to become Central Asia's tallest building when it is completed in 2016. The UAE's Aldar Properties announced in June 2012 that the joint venture comprising Arabtec and Consolidated Contractors Group SAL had been awarded the $1.1bn contract to develop the complex. More recently, EFECO, a subsidiary of the Dubai-based Arabtec Holding, was given a 1 billion dirham ($272m) contract for mechanical, electrical and plumbing work at the plaza.

Other major investments include Kazakhstan's first Islamic bank Al Hilal. The bank, which was launched with an investment of around $500m, according to Al Bawaba, has been a pioneer of Islamic finance in Kazakhstan since it entered the market in 2009.

Also in the financial sector, the Al Falah Investment Fund has invested in Kazakhstan including the co-financing the Falah Growth Fund alongside Kazakhstan's Kazyna Capital Management.

Meanwhile, Dubai-based DP World is planning to invest $1bn in two free economic zones on Kazakhstan's

April 2014


borders. DP World has already signed an agreement to cooperate with the Kazakhstani government and national railways operator Kazakhstan Temir Zholy on the development of the Khorgos-Eastern Gate on the eastern border with China and Aktau Port on the Caspian coast.

Overall, trade between the UAE-Kazakhstan is expected to reach $20bn within five years, Sharif said during a Dubai forum on investment in Central Asia, Al Bawaba reported.

Kazakh plant supplies first gold to central bankA new Kazakh gold-refining plant has supplied the first batch of gold to the National Bank of the Republic of Kazakhstan. The Astana-based Tau-Ken Altyn plant supplied 500 kg of refined gold worth $21m on April 2.

"[The] ultimate task is to refine all gold that is produced in the country. Raw material is abundant in the country," Kazinform quotes the plant's director Meyramgali Tleuzhanov as saying. "We are competitive in terms of price with Russia's nine major gold-refining plants... Kazakh raw material [refined in Russia] loses a lot of money on insurance, security and transport, while we are located nearby."

Tau-Ken Altyn is Kazakhstan's third gold-refining plant and it was commissioned in December 2013. The plant's capacity is 25 tonnes of gold a year.

"We [Kazakh plants] are not competitors to one another and we don't have problems with marketing because our main task is satisfy the needs of the National Bank," Tleuzhanov added.

By law, the government enjoys the right to buy all gold produced in the country. In August 2011, the National Bank said it would start exercising this right to increase the share of gold in its gold and forex reserves.

Deputy Prime Minister and Industry and New Technologies Minister Aset Isekeshev said last October that Kazakhstan was expected to produce 46 tonnes of refined and unrefined gold in 2013, of which the National Bank would buy about 26 tonnes of gold refined in the country and the rest would be exported due to a lack of capacity to refine it.

The National Bank aims to increase the share of gold in its gold and forex reserves: this share went up from 14.1% in December 2011 to 24.1% in February 2014.

ADB report: Central Asia to maintain growth but Ukraine events pose riskCentral Asia should maintain its growth rate as its largest economy - Kazakhstan - boosts public spending, but the events in Ukraine pose a risk to the regional economy, the Asian Development Bank says in its Asian Development Outlook 2014.

"Unexpectedly strong" performance in Kazakhstan, which accounts for almost half of the regional economy, and "sharp gains" in Azerbaijan and Kyrgyzstan raise Central Asia's growth rate by nearly a percentage point to 6.5% in 2013, the ADB says.

Central Asia is expected to sustain this growth rate in 2014 and 2015, helped by a 10% rise in public-sector wages in Kazakhstan following the 19% devaluation of the tenge in February, together with high public spending and growing private consumption in Uzbekistan.

Overall inflation in the region is expected to accelerate to 9%, reflecting the devaluation of the national currencies in Kazakhstan, Kyrgyzstan and Tajikistan and higher growth in Georgia and Turkmenistan. However, it should slow to 7.4% in 2015 as the impact of the depreciation wanes and growth slows down in Azerbaijan,

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Turkmenistan and Uzbekistan, the ADB says.While Central Asia's has the potential to accelerate growth, the region faces risks connected to the ongoing crisis in Ukraine.

"Heightened geopolitical tension clouds Central Asia's outlook," the ADB says. "Recent political developments in Ukraine are compounding pressure on the already weakening ruble", which lost 10.3% of its market value against the US dollar in the first quarter of 2014.

Regional countries' responses to the falling ruble depend on the strength of their trade links with Russia and whether their exports compete with those of Russia, the ADB says.

McDonald’s may finally arrive in Central AsiaOne of the world's largest fast-food chains, McDonald's, is rumoured to have finally decided

to enter Central Asia with the first outlets expected to open Kazakhstan in the second quarter of 2014.

While there has not yet been an official confirmation from McDonald's, which entered CEE markets and Russia back in the 1990s, the social media buzz in Kazakhstan is growing.

Kazakhstan's Tengrinews agency says it has confirmation from the Astana city department for entrepreneurship and industry. A spokesperson for the Khan Shatyr shopping mall, designed by British architect Norman Foster in Astana, told Tengrinews that McDonalds would open its outlet in this venue on June 1. Another outlet is expected to be opened in downtown Almaty, Kazakhstan's former capital and largest city.

The purchasing power of Kazakhstan's population has been growing steadily, and McDonald's arch-rivals - KFC and Burger King - have already set up shop in Kazakhstan.

April 2014

bne:Invest in Astana - April 2014

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